What is a covered call ETF?
An exchange-traded fund (ETF) called a covered call uses the strategy of selling call options on the companies it owns to generate income. The word “covered” refers to the fact that the ETF holds the underlying stocks on which it provides call options to “cover” or protect against any losses if the stock price decreases.
Using the call option selling strategy, the ETF’s portfolio can generate income without needing to sell the underlying assets. When an ETF offers a call option, it promises the option buyer that it will sell the underlying asset at the price specified in the option (the “strike price”).
Covered call ETFs may provide investors with a higher level of income than standard equity ETFs since the revenue from the sale of call options can augment the dividends received from the underlying stocks.
Using the call option selling strategy, the ETF’s portfolio can generate income without needing to sell the underlying assets. When an ETF offers a call option, it promises the option buyer that it will sell the underlying asset at the price specified in the option (the “strike price”). Covered call ETFs may provide investors with a higher level of income than standard equity ETFs since the revenue from the sale of call options can augment the dividends received from the underlying stocks.
It is crucial to consider the ETF’s liquidity. To be sure that you will be able to sell your shares when necessary, it is imperative to research the liquidity of the ETF and the underlying equities before making an investment.
Furthermore, it is crucial to remember that not all investors must employ the covered call technique. For investors who seek to maximize returns immediately or who have a high risk tolerance, the strategy might not be the ideal option. The strategy might not be the best choice for investors searching for investments with big growth potential because the ETF might have to sell its shares at the strike price if the stock price increases above that level.
Some popular covered-call ETFs in stocks and bonds in 2024
More details about each can be found on
https://www.etf.com/channels/covered-calls
XYLD: XYLD tracks an index of S&P 500 stocks and sells one-month, at-the-money call options on up to 100% of each stock. It offers a new twist on an old strategy, writing calls against the S&P 500 stocks in its plain basket in order to earn the premium.
QYLD: The Global X NASDAQ 100 Covered Call ETF (QYLD) follows a “covered call” strategy in which the ETF buys the stocks in the Nasdaq 100 index, then sells corresponding call options to generate a little extra income for investors. QYLD seeks yield from the Nasdaq-100 via an options premium. Historically, investors came to the Nasdaq for growth, not yield.
JEPI: The JPMorgan Equity Premium Income ETF (JEPI) is an actively managed fund that generates income by selling options on U.S. large-cap stocks. The fund invests in S&P 500 stocks that exhibit low volatility and value characteristics and sells options on those stocks to generate additional income.
JEPQ: JEPQ is an actively managed fund of US large-cap companies from the Nasdaq-100 Index, assessed and managed using ESG factors and a proprietary data science-driven investment approach. JEPQ actively and significantly invests in US large-cap stocks comprising its benchmark, the Nasdaq-100 Index, while pursuing lower volatility.
RYLD: RYLD tracks a market-cap-selected and weighted index along with call options for the underlying index. RYLD holds the Russell 2000 index while holding a succession of one-month at-the-money options on the index. The fund follows a “buy-write” (or covered call) strategy on the underlying index.
DIVO: DIVO is an actively managed ETF that provides income by selecting stocks from the S&P 500 Index overlaid with a tactical call-writing strategy. DIVO utilizes an actively managed, income-focused strategy. The fund aims to generate 4-7% annual gross income from two sources: dividends and option premiums.
SVOL: The Simplify Volatility Premium ETF (SVOL) tries to provide investment results before fees and expenses that are about one-fifth to three-tenths (-0.2x to -0.3x) the opposite of the performance of the Cboe Volatility Index (VIX) short-term futures index. It also tries to reduce extreme volatility.
SPYI: SPYI aims for tax-efficient and high monthly income by actively investing in stocks and options on the S&P 500 Index. The fund employs a call-spread approach that uses SPX index option futures contracts. SPYI holds the individual stocks of the S&P 500 Index (SPX) combined with a call spread strategy. The fund seeks to generate high monthly income through dividends from stocks and premiums from SPX call options.
XDTE:The Roundhill S&P 500® 0DTE Covered Call Strategy ETF (“XDTE”) is the first ETF to utilize zero days to expiry (“0DTE”)*** options on the S&P 500®. XDTE seeks to provide overnight exposure to the S&P 500® and generate income each morning by selling out-of-the-money 0DTE calls on the Index. XDTE is an actively-managed ETF.
QDTE: The Roundhill Innovation-100 0DTE Covered Call Strategy ETF (“QDTE”) is the first ETF to utilize zero days to expiry (“0DTE”)*** options on an innovation index (the “Innovation-100 Index” as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generate income each morning by selling out-of-the-money 0DTE calls on the Index. QDTE is an actively-managed ETF.
QQQI: The Fund seeks to distribute high monthly income generated from investing in the constituents of the Nasdaq-100 Index and implementing a data-driven call option strategy.
QRMI: The Global X Nasdaq 100 Risk Managed Income ETF (QRMI) employs a protective net-credit collar strategy for investors seeking the income characteristics of a covered call fund while mitigating the risks of a major market selloff with a protective put.
Also read: Defiance ETFs
JEPY: JEPY, the first put-write ETF on the S&P 500, uses daily options (0DTE) to seek enhanced income for investors. Paid Monthly.
QQQY: the first put-write ETF using daily options (0DTE) to seek enhanced income for investors paid monthly.
IWMY: IWMY, the first put-write ETF on the Russell 2000, uses daily options to seek enhanced income for investors. Paid Monthly.
FEPI: FEPI aims for steady high income by selling out of the money call options, harnessing big tech’s volatility while capping some of the potential stock gains.
XRMI: The Global X S&P 500 Risk Managed Income ETF (XRMI) employs a protective net-credit collar strategy for investors seeking the income characteristics of a covered call fund while mitigating the risks of a major market selloff with a protective put.
XYLG: XYLG tracks an index of S&P 500 stocks and sells one-month, at-the-money call options on up to 50% of each stock. XYLG attempts to provide the best of two worlds: growth and yield.
DYLG: DYLG tracks an index of 30 stocks and sells one-month, at-the-money call options on up to 50% of each stock. DYLG attempts to provide the best of two worlds: growth and yield.
Also read: What are dividend ETFs in 2024?
The Wheels options strategy can also be applied to the S&P 500 index as a way to generate retirement income. The strategy involves selling cash-secured puts and covered calls on S&P 500 index options.
The “wheels” strategy is an options trading strategy that has gained popularity in recent years. It is primarily used by active investors and traders, rather than being specifically designed for retirement income.
The Wheels strategy, also known as “The Wheel Strategy” or “The Wheel Trade,” involves selling cash-secured puts on stocks you wouldn’t mind owning and, if assigned, selling covered calls against those stocks. The goal is to generate income from option premiums while potentially acquiring stocks at a favorable price.
QYLG: QYLG tracks an index that holds Nasdaq 100 stocks and sells call options on half the value of those stocks to collect the premiums and allow for growth. QYLG is passively managed to provide both the potential for growth and some yield from the Nasdaq 100 Index. Historically, investors came to the Nasdaq for growth, not yield.
DJIA: DJIA tracks an index that uses a covered-call strategy to provide long exposure to the stocks in the Dow Jones Industrial Average and sell at-the-money index call options on each position. DJIA writes covered calls on its portfolio of Dow Jones Industrial Average (the Dow) stocks. Writing covered calls is an options strategy that potentially increases yield but also limits upside potential. The fund writes the near-term options generally each month, and each option’s exercise price is at or above the current price level of the Dow.
TLTW: TLTW uses a fund-of-funds approach to passively track an index that measures the performance of holding shares of the iShares 20+ Year Treasury Bond ETF and writes one-month, out-of-the-money call options against the shares. The fund holds shares of the iShares 20+ Year Treasury Bond ETF (ticker: TLT) and writes (sells) one-month, 102% out-of-the-money covered call options. The objective is to provide additional income in the form of option premiums along with the distributions received from the underlying bond portfolio.
LQDW: LQDW uses a fund-of-funds approach to passively track an index that measures the performance of holding shares of the iShares USD Investment Grade Corporate Bond ETF and writes one-month call options against the shares. LQDW is one of the first bond ETFs to utilize a buy-write strategy. The fund holds shares of the iShares USD Investment Grade Corporate Bond ETF (ticker: LQD), one of the first bond ETFs offered in the US, and writes (sells) one-month covered call options. The objective is to provide additional income in the form of option premiums along with the distributions received from the underlying bond portfolio. The fund will write call options up to the full amount of the shares held in the portfolio.
HYGW: HYGW uses a fund-of-funds approach to passively track an index that measures the performance of holding shares of the iShares High Yield Corporate Bond ETF and writing one-month call options against the shares. The fund holds shares of the iShares High Yield Corporate Bond ETF (ticker: HYG), one of the first bond ETFs offered in the US, and writes (sells) one-month covered call options. The objective is to provide additional income in the form of option premiums along with the distributions received from the underlying bond portfolio.
TRES: The Fund will primarily invest in options strategies involving Treasury ETFs, allocating up to 50% of its net assets to long option positions, debit spreads, calendar spreads, and diagonal spreads (each, based on the net premium). The Fund will also allocate up to 80% of its net assets to credit spreads (using Treasury securities as collateral).
MAXI: The Simplify Bitcoin Strategy PLUS Income ETF (MAXI) seeks capital gains and income by providing investors with exposure to bitcoin while simultaneously generating income by selling short-dated put and/or call spreads on a variety of equity and fixed income instruments, which may include indices, ETFs, or individual securities.
YieldMax ETFs seek to generate monthly income by selling or writing call options on single-company stocks or single ETF exposures.
Also read: YieldMax Option Income Strategy ETFs
APLY: APLY uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Apple stock (AAPL). The actively managed fund uses both standardized exchange-traded and FLEX options.
MSFO: MSFO uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Microsoft stock (MSFT). The actively managed fund uses both standardized exchange-traded and FLEX options.
GOOY: GOOY uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Google stock (GOOG). The actively managed fund uses both standardized exchange-traded and FLEX options.
AMZY: Through a synthetic covered call strategy with cash and US Treasury securities as collateral, AMZY aims to provide current income and cap gains on Amazon stock (AMZN). The actively managed fund uses both standardized exchange-traded and FLEX options.
NVDY: NVDY uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Nvidia stock (NVDA). The actively managed fund uses both standardized exchange-traded and FLEX options.
FBY: FBY uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Meta stock (META). The actively managed fund uses both standardized exchange-traded and FLEX options.
TSLY: TSLY uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Tesla stock (TSLA). The actively managed fund uses both standardized exchange-traded and FLEX options.
JPMO: JPMO uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on JP Morgan stock (JPM). The actively managed fund uses both standardized exchange-traded and FLEX options.
XOMO: XOMO uses a synthetic covered call strategy with cash and US Treasury securities as collateral to provide current income and cap gains on Exxon Mobile (XOM). The actively managed fund uses both standardized exchange-traded and FLEX options.
YMAX: The Fund is a “fund of funds,” meaning that it will primarily invest its assets in certain YieldMax ETFs. The Fund’s portfolio will be reallocated on a monthly basis so that each YieldMax ETF held in the Fund’s portfolio, including any eligible new YieldMax ETF that is added to the portfolio, is equally weighted.
YMAG: The Fund is a “fund of funds,” meaning that it will primarily invest its assets in seven YieldMax ETFs. The Fund’s name refers to its strategy of gaining exposure to the common stocks of seven companies, which together are commonly referred to as the “Magnificent 7”. Magnificent 7 Companies: Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOGL), Meta Platforms, Inc. (FBY), Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA) and Tesla, Inc. (TSLA).
Conclusion
In conclusion, buying a covered-call ETF might be a smart move to boost income and perhaps even reduce volatility in a portfolio. Prior to investing, it is important to consider the underlying portfolio, management approach, costs, tax ramifications, liquidity, and your investment goals and risk tolerance. It is possible that a covered-call ETF will not be suitable for all investors or match all financial objectives. Investors can also consider a variety of income-generating strategies to ensure that their investments are in line with their goals and risk tolerance. They should also review and adjust their portfolios on a regular basis. Following consultation with a financial advisor, a covered call ETF or another income-generating strategy might be appropriate for your investment goals.